Robert Skidelsky, John Maynard Keynes biographer, has written an encouraging piece in the New Statesman this week titled The Optimism Error. 

His perspective on events and ability to clearly communicate the intricacies of policy considerations is enviable.
Particularly, his identification of the appropriate metric, output gap and productivity, by which to understand just how below trend the financial crisis has left us.  Also, his explanation of  "Hysteresis" a concept proposed  by Larry Summers as a way to understand the current extended effects of the crisis. Here he writes:

                " Why is it that the recession turned spare capacity into lost capacity? One answer lies in the ugly word
                 “hysteresis”.

                  This is an idea borrowed from physics. If an insulated wire is wrapped around an iron bar, and an electric            
                  current is then passed along the wire, the iron bar becomes magnetised. Some of this magnetism remains  
                  even after the current has been switched off. A shock has a long-lasting effect. This is labelled hysteresis.

                  An economy experiences hysteresis not when output falls relative to potential output, but when potential  
                  output itself falls as a result of a recession. What happens is that the recession itself shrinks productive    
                  capacity: the economy’s ability to produce output is impaired.

                  The intuition behind it is simple enough: if you let a recession last long enough for capital and labour to  
                  rust away you will lose growth potential, on account of discouraged workers, lost skills, broken banks and
                  missing investment in future productivity. By not taking steps to offset the negative shock of the recession
                  with the positive shock of a stimulus, the coalition government cost the country 10 per cent or more of  
                  potential output."

As he navigates through the limitations inherent in the current paradigm related central banks/QE and relative importance of managing the public debt so not to "destroy confidence in the state’s ability to control its spending, and jeopardise the independence of the central bank."  He concludes that printing money directly for public spending while currently in the policy dialogue "only be a remedy of the last resort."

Still he comes to a particularly strong transitional conclusion, with strong real world support, of differentiating between current and capital spending and the deployment of public investment banks as a work around to support much needed investment.

"In our present situation, with little spare capacity, the government needs to think much more carefully about what it should be borrowing for. Public finance theory makes a clear distinction between current and capital spending. A sound rule is that governments should cover their current or recurrent spending by taxation, but should borrow for capital spending, that is, investment. This is because current spending gives rise to no government-owned assets, whereas capital spending does.If these assets are productive, they pay for themselves by increasing government earnings, either through user charges or through increased tax revenues. If I pay for all my groceries “on tick” my debt will just go on rising. But if I borrow to invest in, say, my education, my increased earnings will be available to discharge my debt."
 
Calling for a publicly funded British Investment Bank he cites examples like the European Investment Bank and German KfW (Kreditanstalt für Wiederaufbau) that successfully support infrastructure and export  financing.

"Unfortunately, the conventional view in Britain is that a government-backed bank would be bound, for one reason or another, to “pick losers”, and thereby pile up non-performing loans. Like all fundamentalist beliefs, this has little empirical backing....George Osborne has rejected this route to modernisation. Instead of borrowing to renovate our infrastructure, the Chancellor is trying to get foreign, especially Chinese, companies to do it, even if they are state-owned. Looking at British energy companies and rail franchises, we can see that this is merely the latest in a long history of handing over our national assets to foreign states. Public enterprise is apparently good if it is not British."

​From the Functional Finance perspective we see the limitations of monetary policy and private finance to restore output and productivity as a clear obligation for our democratically elected representatives to act. While not ideal, funding quasi government organizations as a politically feasible route to that objective is worth highlighting

The latest legislative developments in financing public investment. This is a very politically practical maneuver by our legislators side stepping the previous requirement by funding necessary public infrastructure investment by tapping into Federal Reserve dividends and surplus funds.

Ellen Brown writes:
For at least a decade, think tanks, commissions and other stakeholders have fought to get Congress to address the staggering backlog of maintenance, upkeep and improvements required to bring the nation’s infrastructure into the 21st century. Countries with less in the way of assets have overtaken the US in innovation and efficiency, while our dysfunctional Congress has battled endlessly over the fiscal cliff, tax reform, entitlement reform, and deficit reduction.
Both houses and both political parties agree that something must be done, but they have been unable to agree on where to find the funds. Republicans aren’t willing to raise taxes on the rich, and Democrats aren’t willing to cut social services for the poor.
In December 2015, however, a compromise was finally reached. On December 4, the last day the Department of Transportation was authorized to cut checks for highway and transit projects, President Obama signed a 1,300-page $305-billion transportation infrastructure bill that renewed existing highway and transit programs. According to America’s civil engineers, the sum was not nearly enough for all the work that needs to be done. But the bill was nevertheless considered a landmark achievement, because Congress has not been able to agree on how to fund a long-term highway and transit bill since 2005.
That was one of its landmark achievements. Less publicized was where Congress would get the money: largely from the Federal Reserve and Wall Street megabanks. The deal was summarized in a December 1st Bloomberg article titled “Highway Bill Compromise Would Take Money from US Banks”:
The highway measure would be financed in part by a one-time use of Federal Reserve surplus funds and by a reduction in the 6 percent dividend that national banks receive from the Fed. . . . Banks with $10 billion or less in assets would be exempt from the cut.
The Fed’s surplus capital comes from the 12 reserve banks. The highway bill would allow for a one-time draw of $19 billion from the surplus, which totaled $29.3 billion as of Nov. 25. . . .

Banks vigorously fought the dividend cut, which was estimated to generate about $17 billion over 10 years for the highway trust fund.

According to Zachary Warmbrodt, writing in Politico in November, the Fed registered “strong concerns about using the resources of the Federal Reserve to finance fiscal spending.” But former Federal Reserve Chairman Ben Bernanke, who is now at the Brookings Institute, acknowledged in a blog post that the Fed could operate with little or no capital. His objection was that it is “not good optics or good precedent” to raid an independent central bank. It doesn’t look good.

Rep. Peter DeFazio (D-Oregon), ranking member on the House Transportation Committee, retorted, “For the Federal Reserve to be saying this impinges upon their integrity, etc., etc. — you know, it’s absurd. This is a body that creates money out of nothing.”
DeFazio also said, “[I]f the Fed can bail out the banks and give them preferred interest rates, they can do something for the greater economy and for average Americans. So it was their time to help out a little bit.”
An Idea Whose Time Has Come
It may be their time indeed. For over a century, populists and money reformers have petitioned Congress to solve its funding problems by exercising the sovereign power of government to issue money directly, through either the Federal Reserve or the Treasury.
In the 1860s, Abraham Lincoln issued debt-free US Notes or “greenbacks” to finance much of the Civil War, as well as the transcontinental railroad and the land-grant college system. In the 1890s, populists attempted unsuccessfully to revive this form of infrastructure funding. In the Great Depression, Congress authorized the issuance of several billion dollars of US Notes in the Thomas Amendment to the 1933 Agricultural Adjustment Act. In 1999, Illinois Rep. Ray LaHood introduced the State and Local Government Economic Empowerment Act (H. R. 1452), which would have authorized the US Treasury to issue interest-free loans of US Notes to state and local governments for infrastructure investment.
Law professor Timothy Canova plans to reintroduce this funding model if elected to represent Florida’s 23rd Congressional district, where he is now running against the controversial Debbie Wasserman Schultz, current chair of the Democratic National Convention. Prof. Canova wrote in a December 2012 article:
. . . Wall Street bankers and mainstream economists will argue that greenbacks and other such proposals would be inflationary, depreciate the dollar, tank the bond market, and bring an end to Western civilization. Yet, we’ve seen four years of the Federal Reserve—now on its third quantitative-easing program—experimenting with its own type of greenback program, creating new money out of thin air in the form of credits in Federal Reserve Notes to purchase trillions of dollars of bonds from big banks and hedge funds. While the value of the dollar has not collapsed and the bond market remains strong, neither have those newly created trillions trickled down to Main Street and the struggling middle classes. The most significant effect of the Fed’s programs has been to prop up banks, bond prices, and the stock market, with hardly any benefit to Main Street.
In a January 2015 op-ed in the UK Guardian titled “European Central Bank’s QE Is a Missed Opportunity,” Tony Pugh concurred, stating of the US and European QE programs:
Quantitative easing, as practised by the Bank of England and the US Federal Reserve, merely flooded the financial sector with money to the benefit of bondholders. This did not create a so-called wealth affect, with a trickle-down to the real producing economy.
. . . If the EU were bold enough, it could fund infrastructure or renewables projects directly through the electronic creation of money, without having to borrow. Our government has that authority, but lacks the political will. The [Confederation of British Industry] has calculated that every £1 of such expenditure would increase GDP by £2.80 through the money multiplier. The Bank of England’s QE programme of £375bn was a wasted opportunity.
According to IMF director Christine Lagarde, writing in The Economist in November 2015:
IMF research shows that, in advanced economies, an increase in investment spending worth one percentage point of GDP raises the overall level of output by about 0.4% in the same year and by 1.5% four years after the spending increase.
In a December 2015 paper titled “Recovery in the Eurozone: Using Money Creation to Stimulate the Real Economy”, Frank van Lerven expanded on this research, writing:
For the Eurozone, statistical analysis of income and consumption patterns suggests that €100 billion of newly created money distributed to citizens would lead to an increase in GDP of around €232 billion. Using IMF fiscal multipliers, our empirical analysis further suggests that using the money to fund a €100 billion increase in public investment would reduce unemployment by approximately one million, and could be between 2.5 to 12 times more effective at stimulating GDP than current QE.
The Hyperinflation Myth
The invariable objection to exercising the government’s sovereign money-creating power is that it would lead to hyperinflation, but these figures belie that assumption. If adding €100 billion for infrastructure increases GDP by €232 billion, prices should actually go down rather than up, since the supply of goods and services (GDP) would have increased more than twice as fast as demand (money). Conventional theory says that prices go up when too much money is chasing too few goods, and in this case the reverse would be true.
In a November 2015 editorial, the Washington Post admonished Congress for blurring the line between fiscal and monetary policy, warning, “Many a banana republic . . . has come to grief using its central bank to facilitate government deficit spending.” But according to Prof. Michael Hudson, who has studied hyperinflations extensively, that is not why banana republics have gotten into trouble for “printing money.” He observes:
The reality is that nearly all hyperinflations stem from a collapse of foreign exchange as a result of having to pay debt service. That was what caused Germany’s hyperinflation in the 1920s, not domestic German spending. It is what caused the Argentinean and other Latin American hyperinflations in the 1980s, and Chile’s hyperinflation earlier.
Promising Possibilities
Any encroachment on the Fed’s turf is viewed by Wall Street and the mainstream media with alarm. But to people struggling with mounting bills and crumbling infrastructure, the development has promising potential. The portal to the central bank’s stream of riches has been forced open, if just a crack. The trickle could one day become a flow, a mighty river of liquidity powering the engines of productivity of a vibrant economy.

For that to happen, however, we need an enlightened citizenry and congressional leaders willing to take up the charge; and that is what makes Prof. Tim Canova’s run for Congress an exciting development.

​Hernando De Soto writing in Project Syndicate makes the connection lost in the response to the Arab Spring-supporting movements toward civil and property rights for citizens still required..

How to Win the War on Terror

"LIMA – It’s been 14 years since President George W. Bush declared a “global war on terror.” Today, after spending $1.6 trillion on that war and killing 101 terrorist chieftains, from Osama bin Laden to “Jihadi John,” the West remains just as vulnerable, if not more so, to extremists who can recruit fighters and strike any Western capital virtually at will. Now that another president – François Hollande of France – has also declared war on terror (as have other European leaders), are the prospects for victory really any better? I have my doubts.
It is time to consider that the strength of our opponents derives, at least to some degree, from sentiments similar to those that animated the American Revolutionary War and the French Revolution: frustration with and alienation from the prevailing system. In Britain’s American colonies before 1776, and throughout France in the years leading up to 1789, ordinary people became convinced that their lives, assets, and businesses had been subject for too long to the predations of arbitrary rulers. That same estrangement is felt nowadays in the Middle East and North Africa.
After all, the Arab Spring began when a poor Tunisian entrepreneur, Mohamed Bouazizi, set himself on fire in December 2010 to protest the merciless expropriation of his business. He committed suicide – as his brother Salem told me in an interview recorded for American public television – for “the right of the poor to buy and sell.”
Within 60 days of Bouazizi’s death, his message galvanized the Arab world. Sixty-three more small entrepreneurs across the greater Middle East replicated his self-immolation, inciting hundreds of millions of Arabs to take to the streets and topple four governments. The force of their rage continues to destabilize the entire region.
The West didn’t grasp this message. As usual, it focused on macroeconomic adjustment and technical assistance, failing even to consider the property rights of the poor majority. This is an old problem: instead of remembering that property rights are what emancipated their societies from sovereign bullies, left-leaning Westerners think that protecting property is rightist dogma, conservatives take legal property rights for granted, and economists associate them with real-estate deals and carpentry.
The West’s failure to encourage Arab governments to establish, protect, and enhance their citizens’ property rights (and provide them with the means) created a vacuum, into which stepped the region’s romantic nationalists and their terrorist offshoots, which are now sending their foot soldiers to Europe. Of course, these fanatics will not be able to boost living standards for the poor – far from it, as the predatory rule of the so-called Islamic State in its self-proclaimed caliphate proves. But in an atmosphere of deprivation and frustration, those who make false promises easily attract adherents.
How long will it take the West to remember that democratic capitalism requires strong property rights to set clear boundaries beyond which the state may not go? Like the entropic universe and all open spaces, the global market is a turbulent place with little respect for life. All living systems, whether natural or organized by man, originate and operate only in encapsulated spaces. Whether we are talking about cells, molecules, body organs, computers, or social groups, each and every one is contained and constrained within a boundary: a membrane, an epidermis, a wall, or a legal right.
Within the boundaries of our bodies, complex multi-cellular structures are sustained by the production of molecules that ensure cooperation and the exchange of information among cells – a process known as “signaling.” Impairments in this process can lead to the onset of disorders such as cancer. If detached from other cells or the surrounding matrix, cells usually die within a short time, a process called “anoikis,” Greek for homelessness.
Whoever ends “anoikis” in the greater Middle East will win the war on terror. That is why the West and its allies must help the 80% of the population whose survival depends on the boundaries needed to protect them and their assets (property rights and limited liability). They need the signaling mechanisms to detect danger (records and tracking systems that come from recording assets and firms). They need the adhesion molecules to connect with others and build increasingly complex and valuable combinations (legally enforceable contracts). And they need the ability to use assets to guarantee credit and create capital (shares and stock to divide, extend, and collateralize property). Otherwise, the combined military forces of Europe and the United States – and now Russia – will win nothing.
If Hollande, the next US president, and their Arab allies are to stop terrorism, they must press (and help) Middle East governments to provide their people with the protections that will nurture their potential to prosper on equal terms in the global market. That is what the American and French revolutionaries did. And it is the surest way to deny extremists the attractiveness that sustains their existence."